Auto loan refinancing: should trade-in my car or refinance?

After a few years of paying for your car there are always a few inevitable questions that may come to mind:

• Should I refinance my car loan?
• Is it a good time to refinance?
• Should I trade in my car?
• Am I financially stable enough to refinance or trade in my car?

Refinancing or trading in your car loan could change a lot of things. It is important to ask yourself these questions but remember there are a few other factors to consider before making the final decision.

What is refinancing a car loan?

Simply put, refinancing a car loan is when you get a new loan to replace your old one. Depending on if you get a good refinancing deal it could mean a lower interest rate and a lower monthly payment. It is important to understand the refinancing process before you get started.

1. Payoff Statements

Ask your current lender for a payoff statement which will let you know how much you still owe on the existing loan.

‍2. Close on the new car loan

Once you complete all the necessary paperwork the new lender will send a check to your old lender to pay off your loan amount, and then you can start making payments on your new auto refinance loan.

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The steps to refinancing are quite straight forward but considering the pros and cons before making the decision is an important prerequisite:

Pros to refinancing:

• Lower Monthly Payments. Once you refinance your auto loan payments will probably change. For example, if you switch to a loan with a 60-month repayment term opposed to a 36-month repayment term your monthly car payment will be lower. With lower car payments you could possibly save money to make other important financial decisions like buying a home or even just putting more money into your savings account.
• Lower Interest Rates. If your credit score is higher or more robust than when you initially took out your current auto loan you could be offered a new loan with a lower interest rate. You could even add a cosigner to help you get a loan with a lower interest rate.

Cons to refinancing:

• Car Value. The moment you drive off of the car lot the value of your car starts to depreciate. This may cause the lenders to be hesitant to offer you a car loan refinance since the car has lost a lot of its value.
• Longer Loan Terms. Although a longer loan term can mean lower monthly payments you could eventually end up adding to the total cost of the car. For example, with a 36-month loan you will pay off the original loan faster than you would with a 60-month loan therefore, you will be paying less interest.

What is trading in a car?

Trading in your car is when you switch out your current vehicle for a new one. Sounds exciting, doesn't it? It could be the perfect decision for you depending on your financial situation and what you are looking for in a car.

There are many reasons you may want to trade in your car but before you do that you need to do a little bit of homework first:

1. Examine the Value of Your Current Car

As mentioned earlier the moment you leave the dealership your car starts to lose value. To find out your trade-in value, check out Kelly Blue Book or the NADA website.

2. Assess Your Budget

Think realistically about what you can afford A new car could result in a higher or lower monthly payment, be honest with yourself about whether you need to be saving money or taking on new monthly expenses.

‍3. Get Pre-approved

Getting pre-approved for a car loan can help facilitate the trade-in-a-car process since you won't have to wait on the dealership to tell you if you are approved or not.

Pros to trading in a car:

1. New Car

A new car purchase can be very exciting. You get a chance to get some of the features your old car may not have such as better gas mileage, four-wheel drive, or new technology such as Bluetooth car play.‍

2. New Loan

‍If you trade in a car for a cheaper option your new loan payment could be lower which is a huge benefit. A new auto loan with a lower monthly payment could be the financial fresh start you need.‍

3. Can Happen Fast

‍Depending on where you shop for a car you can close a trade-in in a day. You can use an online lender like Carvana and CarMax who make the process relatively simple.

Cons to trading in a car:

• Fees. A trade-in can come with fees such as sales tax, vehicle registration, and documentation fees. Some of that may need to be paid upfront so you should include that in your trade-in budget.
• Positive or negative equity. If you owe more on your total loan the car is worth, that is considered negative equity. Oppositely if your car is worth more than your total loan balance then you have positive equity. If you have negative equity when you start the process to trade in your car it may cause some difficulties. If this is the case you will need to give the dealer your trade-in and the amount of the negative equity or finance the negative equity into your new auto loan..

Current state of the auto industry

Now that you have read some of the pros and cons of each option there is one more factor that may not have crossed your mind: the state of the auto industry. According to AlixPartners, the auto industry lost around $210 billion in revenue in 2021. Due to COVID-19 and the economy, the way people are thinking about cars and auto loans has changed drastically in the past 2 years.

• ‍Product Shortages. When covid-19 struck it caused a pause in production for a variety of products and parts needed in the car industry. This led to major production cuts so therefore, there may not be as many cars available today to choose from.‍
• Higher Prices for New Cars. According to industry data, at the end of 2021, a typical new vehicle cost $45,000, up about $8,000 from December 2020.

So what should you do - trade-in your car or refinance?

Depending on your situation, RateWorks can help by potentially saving you up to $1,200 per year while also offering one flat rate, regardless of the loan term you choose. After, you should also assess the value of your car to see if trading it in will get you an even lower payment. Then, you can compare the two scenarios and decide which is the right decision for you. If you're ready to see what we can do for you, get your FREE quote and start saving!